Testing Optimal Seigniorage Theory in Taiwan 1965-2012

Abstract

The optimal collection of taxes and seigniorage is an important issue in public finance. For developing and emerging countries, seigniorage is particularly essential to provide an additional source for government revenue. Barro (1979) and Mankiw(1987) propose tax-smoothing and revenue-smoothing hypotheses to discuss how the government should optimally collect taxes. This paper aims to test the taxand revenue-smoothing hypotheses with Taiwaneseannual data from 1965 to 2012. Unit root tests and Johansen’s cointegration technique are employed. Our results indicate that Taiwanese data are in favor of these two hypotheses. The government may have used seignorage as a supplement to raise tax revenue. Moreover, both fiscal policy and monetary policy are implemented in an optimal fashion to finance government expenditure.